Cummins Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

OPERATING SEGMENTS

OPERATING SEGMENTS

3 Months Ended

Mar. 29, 2020

NOTE 15. OPERATING SEGMENTS

Operating segments under GAAP are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is the President and Chief Operating Officer.

Our reportable operating segments consist of Engine, Distribution, Components, Power Systems and New Power. This reporting structure is organized according to the products and markets each segment serves. The Engine segment produces engines (15 liters and smaller) and associated parts for sale to customers in on-highway and various off-highway markets. Our engines are used in trucks of all sizes, buses and recreational vehicles, as well as in various industrial applications, including construction, agriculture, power generation systems and other off-highway applications. The Distribution segment includes wholly-owned and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts, as well as performing service and repair activities on our products and maintaining relationships with various OEMs throughout the world. The Components segment sells filtration products, aftertreatment systems, turbochargers, electronics, fuel systems and automated transmissions. The Power Systems segment is an integrated power provider, which designs, manufactures and sells engines (16 liters and larger) for industrial applications (including mining, oil and gas, marine and rail), standby and prime power generator sets, alternators and other power components. The New Power segment designs, manufactures, sells and supports electrified power systems ranging from fully electric to hybrid along with innovative components and subsystems, including battery, fuel cell and hydrogen production technologies. We continue to serve all our markets as they adopt electrification and alternative power technologies, meeting the needs of our OEM partners and end customers.

We use EBITDA (defined as earnings before interest expense, income taxes, noncontrolling interests, depreciation and amortization) as the primary basis for the CODM to evaluate the performance of each of our reportable operating segments. We believe EBITDA is a useful measure of our operating performance as it assists investors and debt holders in comparing our performance on a consistent basis without regard to financing methods, capital structure, income taxes or depreciation and amortization methods, which can vary significantly depending upon many factors. Segment amounts exclude certain expenses not specifically identifiable to segments.

The accounting policies of our operating segments are the same as those applied in our Condensed Consolidated Financial Statements. We prepared the financial results of our operating segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We allocate certain common costs and expenses, primarily corporate functions, among segments differently than we would for stand-alone financial information prepared in accordance with GAAP. These include certain costs and expenses of shared services, such as information technology, human resources, legal, finance and supply chain management. We do not allocate gains (losses) of

corporate owned life insurance or restructuring charges related to corporate functions to individual segments. EBITDA may not be consistent with measures used by other companies.

Summarized financial information regarding our reportable operating segments for the three months ended is shown in the table below:


In millions	Engine		Distribution		Components		Power Systems		New Power		Total Segments		Intersegment Eliminations ⁽¹⁾		Total
Three months ended March 29, 2020
External sales	$	1,579	$	1,807	$	1,115	$	500	$	10	$	5,011	$	—	$	5,011
Intersegment sales	579		7		387		384		—		1,357		(1,357)		—
Total sales	2,158		1,814		1,502		884		10		6,368		(1,357)		5,011
Research, development and engineering expenses	80		7		68		54		29		238		—		238
Equity, royalty and interest income from investees	78		21		21		9		—		129		—		129

Interest income ⁽²⁾	4		1		1		1		—		7		—		7
Segment EBITDA	365		158		279		77		(43)		836		10		846
Depreciation and amortization ⁽³⁾	53		31		48		32		4		168		—		168



Three months ended March 31, 2019
External sales	$	1,984	$	1,993	$	1,401	$	623	$	3	$	6,004	$	—	$	6,004
Intersegment sales	669		8		460		454		—		1,591		(1,591)		—
Total sales	2,653		2,001		1,861		1,077		3		7,595		(1,591)		6,004
Research, development and engineering expenses	78		7		75		56		21		237		—		237
Equity, royalty and interest income from investees	56		11		10		15		—		92		—		92

Interest income ⁽²⁾	4		4		2		2		—		12		—		12
Segment EBITDA	438		171		325		138		(29)		1,043		(10)		1,033
Depreciation and amortization ⁽³⁾	50		29		46		29		2		156		—		156



⁽¹⁾Includes intersegment sales, intersegment profit in inventory eliminations and unallocated corporate expenses. There were no significant unallocated corporate expenses for the three months ended March 29, 2020 and March 31, 2019.
⁽²⁾"Interest income" is managed at the corporate level and allocated to each operating segment.
⁽³⁾Depreciation and amortization, as shown on a segment basis, excludes the amortization of debt discount and deferred costs included in the Condensed Consolidated Statements of Net Income as "Interest expense." The amortization of debt discount and deferred costs was less than $1 million and $1 million for the three months ended March 29, 2020 and March 31, 2019, respectively. A portion of depreciation expense is included in "Research, development and engineering expenses."

A reconciliation of our segment information to the corresponding amounts in the Condensed Consolidated Statements of Net Income is shown in the table below:


	Three months ended
In millions	March 29, 2020		March 31, 2019
Total EBITDA	$	846	$	1,033
Less:
Depreciation and amortization	168		156
Interest expense	23		32
Income before income taxes	$	655	$	845